How to Get Your Business Out of Debt

A growing number of UK businesses are facing insolvency, with the second quarter of 2022 seeing the highest number of insolvencies since 2009. This situation is due to a number of factors, with rising energy costs being a significant concern for many businesses.

For financially distressed businesses, finding ways to manage their debts can stave off the risk of insolvency or, if the business is already insolvent, help it to survive in some form. While this might seem easier said than done, there are a number of tried-and-tested strategies that can be very effective at helping businesses with their debts.

This article is focused on companies, but some of these options – or other similar options – will be available to sole traders or partnerships.

Solvent Restructuring

If your company is still able to pay its debts, but they are still holding you back, there are various ways you can try to improve your business performance.

Refinancing

For some businesses, there may be a simple option. If you refinance with a new or existing lender, or raise some capital another way, that may be enough to pay off other debts and make your payments more manageable. Of course, that depends on finding lenders or investors that are willing to help, which can be a challenge if you are already struggling with debts.

Asset sales

Selling assets can be a quick way to unlock extra cash for the business. There might be assets you do not need or that you could rent instead of owning.

Agreements with Creditors

Sometimes, you will find that your business can reach an agreement with its creditors to restructure their lending by accepting new terms. This can then lower your debt servicing costs. However, this often depends on reaching an agreement with all the creditors; if one holds out for better terms, it may not be possible to proceed. Also, having this conversation with lenders may suggest your business is insolvent. If you trigger default clauses in your loan documentation, you may inadvertently push your business into insolvency. In most cases, it is worth getting a professional to speak to the lenders on your behalf, so you can benefit from their credibility.

Other Forms of Restructuring your Business

If your business cannot pay its debts as they fall due, it is insolvent. In this scenario, it may still be possible to use the techniques described above. However, there are three main problems.

Firstly, directors of insolvent companies have special obligations placed on them, so it is critical to take expert advice on your situation and ensure any steps that you take are supported by advice. There is less freedom for directors to reach agreements when they may be criticised later, for example if they favour some creditors over others. That is why insolvent restructuring methods are usually supervised by independent professionals called insolvency practitioners.

Secondly, as explained above, you may find that some creditors are willing to restructure and others are unwilling. Even creditors that are willing in principle to write down or restructure their debt will want to have a fair deal. They are unlikely to agree to a bigger reduction when other creditors are paid in full. Most insolvency processes are designed to achieve fairness between creditors.

Finally, there may be a rush to the exit. Creditors who realise that you are in financial trouble will concentrate on getting the best return for themselves. That may push them towards taking aggressive action, which in turn makes it impossible for your business to carry on trading. Some insolvency processes involve a moratorium, which ensures your business has a breathing space while the restructuring takes place.

Company Voluntary Agreement (CVA)

A Company Voluntary Agreement, or CVA, is a way of restructuring debts while your business carries on trading. Unlike a voluntary discussion with creditors, this can be effective and bind all your creditors, even if some of them do not agree. While the arrangement is supervised by an insolvency practitioner, the directors continue running the business while the agreement is in place.

The main problem with a CVA is that it does not come with any automatic moratorium. It is therefore more about long term issues with debt, rather than bringing immediate relief.

Administration

Administration is a more intrusive but also flexible restructuring option, where insolvency practitioners take charge of a company. Sometimes this is so they can turnaround the company while continuing to trade. More often they will try to sell the business of the company in a way that preserves as much value as possible.

You may therefore be able to put your company into administration and buy back the business from the administrators, without having to deal with the historic debts. In some cases it may even be possible to agree the deal in advance – a so called ‘pre-pack’ administration. The main advantage of administration is that it includes a moratorium and binds all creditors.

Other Options

There are other restructuring options that can be used in particular cases, such as stand alone moratoriums and super schemes. In other cases, the most effective way to deal with debts is to allow a company to go into liquidation, then start afresh.

Speak to our restructuring experts

Facing up to business debt and finding a way forward can be a daunting prospect, but with the right legal support, it is often possible for distressed businesses to turn things around. Longmores’ restructuring solicitors are highly experienced, with an excellent track record of helping struggling businesses and links to trustworthy and experienced insolvency practitioners.

With their help, you can understand your options, and put together an intelligent restructuring plan that addresses your business’s problems and sets you up for future success.

To discuss how we can help with restructuring your business, please get in touch, and we will be happy to advise.